April 2014, Vol. 241 No. 4

Editor's Notebook

Editor's Notebook: Arctic Friendship

I’m watching the Crimeans celebrate in the streets after the Russian invasion. Don’t you understand you’ve just lost your freedom? Then again, they may have had guns pointed at them.

Whatever reasons Vladimir Putin and his minions had for their unwarranted takeover, energy has long been a source of friction between Russia and Ukraine. Russia supplies 65% of Ukraine’s natural gas but has often accused its neighbor of stealing gas. Russia has previously shut off gas to Ukraine because of non-payment of bills, now at $2 billion.

About 25% of the European Union’s gas comes from Gazprom, 80% via Ukrainian pipelines. That’s why Russia wants to build the South Stream gas pipeline into southeast Europe, bypassing Ukraine. However, the European Commission said the project fails to meet European regulations. Meetings between the two sides are up in the air.

As the U.S. and its allies apply sanctions and await the Kremlin’s next move, Putin may have paved the way for the U.S. to develop an actual energy strategy. The shale revolution has made us a major player on the world stage. It depends on our political will. President Obama is a great organizer but he has been less than enthusiastic about fossil fuels. Coal is on the way out; natural gas is in. As for oil – he and Big Oil don’t exactly see eye-to-eye on very much.

That can change, thanks to Vlad. Energy fuels Russia’s economy and Putin has been deeply involved in every significant oil and gas deal since he came to power. Russia likes to bully, but can’t afford to reduce or cut off natural gas to Europe which will eventually diversify its supply. Gazprom’s revenues have been falling because of infrastructure costs and the growing competition from LNG.

The U.S. is poised to become the world’s leading natural gas exporter. The Department of Energy has approved seven permits and may ease the process now that it’s deemed in the national interest. It’ll take several years and billions of dollars to get those terminals up and running, but the product is here and the price stability will encourage producers to keep drilling.

What we might even see, again because it’s in the national interest, is an LNG export terminal on or off the East Coast within close proximity to the Marcellus Shale. Because natural gas can be shipped to whoever is willing to pay for it, an export terminal in Alaska makes increasing sense. Let’s tell South Korea and Japan that we’ll be more than happy to sell them gas.

During my research 20 years ago for my book “The Oil Makers, An Insider’s Perspective of the Petroleum Industry,” there was one recurrent theme that I kept hearing from the CEOs of Big Oil. They considered themselves global companies because they decided they couldn’t make enough money in the U.S. That attitude still prevails.

After the Soviet Union collapsed, oil companies sought to do business in Russia because of its vast reserves of untapped crude. Some, like ExxonMobil, have succeeded in building a relationship while others such as BP have failed. Regardless of how much Putin says he wants to recreate an oligarchical structure, he can’t easily cut ties with the rest of the world.

So this means there is one individual in the U.S. who might be able to bring Putin back to reality. Meet Rex Tillerson, CEO of ExxonMobil. ExxonMobil and state-owned oil company Rosneft have an extraordinary agreement valued to the order of $500 billion. They plan to create a joint venture allowing ExxonMobil to explore for oil and gas in the Kara and Black Seas while Rosneft gains stakes in ExxonMobil properties in the Gulf of Mexico; Permian Basin; Western Canada and Alaska (Point Thomson). They plan to develop the Arctic together and may build an LNG plant in Russia’s far east. They’ve also agreed to develop tight oil reserves in Western Siberia.

And unlike Lee Raymond, who Putin apparently couldn’t stand, he actually likes his successor, Tillerson. Last year in a widely publicized ceremony, Putin awarded ExxonMobil an Order of Friendship in recognition of its agreement with Rosneft.

I want Big Oil, led by Tillerson and the heads of other major companies (minus API), to meet with Obama where they all throw their cards on the table in what New York Times columnist Tom Friedman refers to as the “grand bargain”: offshore drilling, climate change, Keystone, fracking standards, oil and gas exports, etc., designed to “weaken the oil-and-gas autocracy” of Putin.

It can happen, if there is the will, there is the way.

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